Some Results on the Solution of the Neoclassical Growth Model

Jesus Fernandez-Villaverde and Juan F Rubio-Ramirez

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: This paper presents some new results on the solution of the stochastic neoclassical growth model with leisure. We use the method of Judd (2003) to explore how to change variables in the computed policy functions that characterize the behavior of the economy. We find a simple close-form relation between the parameters of the linear and the loglinear solution of the model. We extend this approach to a general class of changes of variables and show how to find the optimal transformation. We report how in this way we reduce the average absolute Euler equation errors of the solution of the model by a factor of three. We also demonstrate how changes of variables correct for variations in the volatility of the economy even if we work with first order policy functions and how we can keep a linear representation of the laws of motion of the model if we use a nearly optimal transformation.

Keywords: Dynamic Equilibrium Economies; Computational Methods; Changes of Variables; Linear and Nonlinear Solution Methods. (search for similar items in EconPapers)
JEL-codes: C63 C68 E37 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2003-11-23
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Some results on the solution of the neoclassical growth model (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:04-002

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